A New Method for Identifying the Effects of Foreign Exchange Interventions

Chih Nan Chen, Tsutomu Watanabe, Tomoyoshi Yabu

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

Central banks react even to intraday changes in the exchange rate; however, in most cases, intervention data are available only at a daily frequency. This temporal aggregation makes it difficult to identify the effects of interventions on the exchange rate. We apply the Bayesian Markov-chain Monte Carlo (MCMC) approach to this endogeneity problem. We use "data augmentation" to obtain intraday intervention amounts and estimate the efficacy of interventions using the augmented data. Applying this new method to Japanese data, we find that an intervention of 1 trillion yen moves the yen/dollar rate by 1.8%, which is more than twice as much as the magnitude reported in previous studies applying ordinary least squares to daily observations. This shows the quantitative importance of the endogeneity problem due to temporal aggregation.

Original languageEnglish
Pages (from-to)1507-1533
Number of pages27
JournalJournal of Money, Credit and Banking
Volume44
Issue number8
DOIs
Publication statusPublished - 2012 Dec

Fingerprint

Foreign exchange intervention
Endogeneity
Exchange rates
Temporal aggregation
Data augmentation
Ordinary least squares
Markov chain Monte Carlo
Central bank
Efficacy

Keywords

  • Endogeneity problem
  • Foreign exchange intervention
  • Intraday data
  • Markov-chain Monte Carlo method
  • Temporal aggregation

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

A New Method for Identifying the Effects of Foreign Exchange Interventions. / Chen, Chih Nan; Watanabe, Tsutomu; Yabu, Tomoyoshi.

In: Journal of Money, Credit and Banking, Vol. 44, No. 8, 12.2012, p. 1507-1533.

Research output: Contribution to journalArticle

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